Key Takeaways
- Every deal needs defined exit strategies for both parties.
- Default provisions with cure periods in every agreement.
- Escrow/servicing prevents the most dangerous default scenario.
- Notes sell at 75-90% of face value for capital recovery.
Every creative deal needs clear exit strategies and default management plans.
Exit Strategies by Structure
Subject-to: refinance, sell, or continue holding. Seller financing buyer: refinance at balloon, sell. Seller financing seller: sell note at 75-90% of face value, or collect full term. Lease option: exercise, let expire, or sell option interest.
Default Management
Buyer default on subject-to: seller's credit at risk—notify seller, resume payments or foreclose. Seller default on wrap underlying: buyer faces foreclosure—escrow prevents this. Include clear default provisions, cure periods, and consequences in all documents.
Selling Notes
Compliance Matrix
Sources
Common Mistakes to Avoid
Not including default provisions with cure periods in creative financing agreements
Consequence: Unclear remedy paths when payments are missed, leading to costly legal disputes
Correction: Every agreement must include specific default triggers, cure period timeframes, and escalating consequences.
Creating wrap mortgages without escrow servicing for the underlying payment
Consequence: The seller/wrap originator may divert the underlying payment, causing foreclosure on the buyer
Correction: Always use independent escrow servicing that pays the underlying mortgage before distributing any spread.
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Test Your Knowledge
1.What is the typical sale discount for seller-financed notes with 12 months of payment history?
2.What is the most dangerous default scenario in a wrap mortgage?
3.What protections should be included for the seller in a subject-to agreement?